| Assume that an older, wealthy widow(er)or divorced | | | | interest in property.Assume that the beneficiary does |
| individual has a substantial amount in tax-deferred | | | | not exercise the right to withdraw the donation. The |
| retirement plans such as defined contribution pension | | | | irrevocable life insurance trust will use the donation by |
| plans, 401k plans, 403b plans, and traditional IRAs. | | | | the parent to pay the premiums on the life |
| The widow(er) wants to leave the retirement plans | | | | insurance.Where does the parent obtain the money |
| to his or her children.The problem is that when the | | | | to donate the money to the trust to pay the life |
| children inherit the tax-deferred retirement plans and | | | | insurance premiums? The parent converts the |
| take distributions from them, the distributions are | | | | balances in the retirement plans into a life annuity. |
| fully taxable to the children. The retirement plans are | | | | Therefore, the parent receives payments for life and |
| income in respect of a decedent (known as IRD), | | | | uses part of them to pay the insurance premiums |
| which is taxable. In addition, the balances in the | | | | through the trust. At the parent's death, the annuity |
| retirement plans are fully included in the decedent's | | | | is worth zero. Therefore, the children do not have |
| gross estate for estate tax purposes.If the individual | | | | any income in respect of a decedent. Nothing from |
| were married rather than being a widow(er)or a | | | | the annuity is included in the gross estate.The life |
| divorced individual, usually the individual would want to | | | | insurance company pays the children the proceeds of |
| leave the money in the retirement plans to his or her | | | | the life insurance policy. The proceeds of life |
| spouse. In that case, the surviving spouse could | | | | insurance on account of the death of the insured are |
| transfer the money into his or her own IRA and | | | | not subject to income tax. They are not subject to |
| treat the account as his or her own. The surviving | | | | estate tax because the decedent did not own the |
| spouse would avoid income tax on the money in the | | | | policy.This plan allows the parent to have an income |
| decedent's tax-deferred retirement plans. The | | | | stream during life from the annuity. The annuity |
| bequest would also qualify for the unlimited marital | | | | payments would be fully taxable unless the individual |
| deduction for estate tax purposes.Is there any way | | | | has any basis in the annuity. The individual will need to |
| to achieve the parent's goal of having enough money | | | | use other income tax planning techniques to reduce |
| to pay living expenses and yet leave a good | | | | the income tax resulting from the annuity |
| inheritance to the children? The answer is yes if the | | | | payments.This strategy converts amounts that would |
| older, wealthy parent is insurable for life insurance | | | | be subject to income tax and estate tax to amounts |
| purposes.Here is how the solution would work. The | | | | that are not subject to income tax or estate tax in |
| parent obtains a life insurance policy large enough to | | | | the hands of the children. This strategy requires the |
| replace the balances in all the tax-deferred retirement | | | | services of a tax advisor, an attorney, and a life |
| plans. However, the parent is not the owner of the | | | | insurance agent. They all must be competent and |
| life insurance. The parent forms an irrevocable life | | | | exercise great care in implementing the strategy. |
| insurance trust that has a "Crummey Powers" clause, | | | | However, if done correctly, this strategy can result in |
| and the irrevocable life insurance trust owns the life | | | | substantial tax savings. It also gives the parent more |
| insurance policy. This technique will keep the value of | | | | peace of mind knowing that the children will not have |
| the life insurance out of the decedent's gross | | | | to pay taxes on the life insurance.Alan D. Campbell is |
| estate.A "Crummey Powers" clause gets its name | | | | a CPA in Arkansas and Florida and is self-employed |
| from a court case. It has to do with whether a gift is | | | | primarily as an author of tax publications. He earned a |
| subject to gift tax. Gifts that are less than the annual | | | | Ph.D. in accounting with an emphasis in taxation from |
| exclusion amount are exempt from gift tax as long | | | | the University of North Texas. He is also admitted to |
| as the gift is a present interest in property. A | | | | practice before the United States Tax Court. He has |
| "Crummey Powers" clause allows the beneficiary of a | | | | published numerous articles on tax topics in |
| life insurance trust the right to withdraw gifts made | | | | professional journals. He is the co-author of the book |
| to the trust that the donor intends to pay for life | | | | Tax Strategies for the Self-Employed and the |
| insurance premiums. As long as the beneficiary has | | | | revision editor of CCH Financial and Estate Planning |
| the right to withdraw the donation under the | | | | Guide, 15th edition. |
| "Crummey Powers" clause, it is a gift of a present | | | | |